CGM

Capital Growth Management is a privately owned manager investment company based in Boston, Massachusetts. At the head of this ship is their captain, Kenneth Heebner. Mr. Heebner is a renowned figure in the industry and has acquired special appreciation from his colleagues and analysts for his courageous moves in the market. He is not afraid to bet against the market against his colleagues who are secretly termed as index huggers for being safe in their decisions. Ken Heebner is an anomaly in his circuit. This anomaly has been severely criticized yet appreciated for his immense success accumulated over the years. He is a dare devil and a go getter and continues that to way till now despite the market crash of 2008-2009. However, this very approach has rendered him severe criticism by the industry as his losses in that year piled a good 48%. To this date, his company has not fully compensated for those losses. Despite, he still continues to be the celebrated anomaly and often followed one.

CGM operates as a subsidiary of Natixis Global Asset Management L.P. Capital Growth Management was founded in 1990 in Boston by Mr. Heebner. It has a total capital value of $6,640 million. It boasts a total number of stocks of 82 with new addition of 40 stocks. It operates as mutual fund management firm. Apart from asset management it is heavily concentrated in advising its clients over their investment decisions. It caters to charitable organizations, pension and profit sharing plans, investment companies and high net worth individuals. It also managed separate client focused equity portfolios in addition to managing mutual funds. It primarily invests in public equity market of United States of America.

CGM in line with its manager’s repute has been termed as “too gutsy to be practical.” According to an article done by CNN website, CGM was observed as a nightmare for those investors who crave predictability. It has been known for going against the odds and playing the big game. When the big game does follow the tide, the returns are astronomical. However, as observed by the Market Crash, when the tide turns against the big game, the losses are astronomical too. CGM holds a mix of stock with major concentration in Mutual Funds. It deals with Focus, Realty and Mutual Funds. Realty Funds have proven to be fruitful for this manager. According to Morningstar peer group, it has the best three year, five year and ten year returns while Focus is doing pretty sharp too. It has returned 30.5% annually from years 2003-2006. Market Crash of 2008 overturned this situation where he led an overall loss of 48% hence proving his critics of his management style right. In 2006, Heebner’s Fund out-placed Miller’s Value Fund ever since its inception in 1982.

Investment Philosophy:

Mr. Heebner himself has been questioned several times to describe his investment philosophy. His reply is always perplexed. He invests with a lot of deep analysis and calculations in which he has a conviction. Most of his investments are those that market veterans had shared no hope for. For example, in 2004 when he invested in oil, majority was of the view that it was going to revert back to $25 a barrel. However, as time unfolded, this was not the case. Similarly buying savings-and-loans in 1982, back when interest rates were 15 percent was considered risky by veterans; Mr. Heebner did not deter to take the plunge.

His portfolio is based upon Mutual Funds, Focus Funds and Realty Funds. He has benefitted from all of these funds, however, Focus has done him the most good. “Since May 1998, Focus has an average annualized return of 24%, the best ten-year record of any U.S. mutual fund, compared with only 4% for Standard & Poor’s 500. Focus, which has $7.4 billion in assets, is already up 15% in 2008 (as of May 19), but it is 2007 that will be remembered as Heebner’s pièce de résistance. Fueled by big bets on energy, fertilizer, and metals, Focus soared 80% last year, vs. 5% for the S&P 500. “I told Ken it was like he was walking between the raindrops,” says CGM president Bob Kemp, who oversees sales and marketing at the firm, of the year Heebner had in 2007. “It amazes even us.” Last year marked the fourth time since 2000 that the fund returned 45% or better. And it’s not as if Heebner has needed the big years to make up for a lot of losses: Launched in late 1997, Focus has had only one money-losing calendar year (2002).”

These represent the pre 2008 situation. As mentioned earlier, post 2008, Heebner did incur voluminous losses and his current profit from 2010 has not been enough to compensate for it. However, the market trend seems positive again in his favour.

Realty and Mutual funds despite the crash have been doing well. There overall performance since 1998 has been remarkable. Realty till 2008 reported an annual return of 22% against its rivals’ return of 6% only. Before the market crash mutual funds retained their position as sixth best in the mutual fund universe according to Morningstar.

For 2011, unfortunately Mr. Heebner’s top three picks underperformed. These included Ford, Free Port McMorman and Teck Resources Ltd. They incurred a loss of 7.9%, 7.6% and 12.3% respectively.

Manager’s Bio:

Kenneth Heebner is the co founder of Capital Growth Management. He established this firm in 1990 in Boston, Massachusetts. He has an experience of more than 30 years behind which have evidently equipped him with market prowess. He is a highly celebrated investor and has caught the public attention many a times. His unconventional methods have been the subject of many discussions. His gutsy demeanor is at best appreciated by all. Even those who disagree with it admit that Mr. Heebner is a keen investor and has a vision. His is not a usual play it safe traditional asset manager. Rather he likes to expand and discover new horizons.

He was born on 27th September 1940 in Philadelphia. He acquired his BA from Amherst College. He later pursued his MBA at Harvard University. Even as an undergrad, Heebner was observed to have disregard for the pack thinking. He always believed in following what he believed in. Once in psychology project, Heebner alongside his other fellow mates was asked to give his impression of a painting. Later in another room an expert was to give an opposing. Out of all the participants Heebner was the only participant who did not change his view in relation to the expert’s view. He proved to be the only anomaly to the experiment’s hypothesis, that an individual can be swayed by the views of the masses or an authority figure.

This very characteristic can be seen in his investment style as well. He has been termed an investing genius by CNN Money. Fortune ran a profile on him and his disregard for the majority view. He has been observed to have taken a holistic view and then evaluate his steps. His company has been consistent in its performance as gauged by the three year plan, five year plan as well as the ten year plan. His investment in energy sector in 2008 has paid him off well. When at the time that everyone expected the oil price to remain stagnant at $25, Heebner took the plunge and reaped the benefits of the risk that he had sown.

Despite being 67 years old, unlike his other colleagues he is not ready to embrace retirement. He has had a career of 30 years of success; still he wants to achieve more. In an interview with CNN money he was asked to recall the last time he took a vacation to relax and unwind himself. In response, Mr. Heebner responded that stocks are what relax him. He is famous for not taking any vacation. Last time that he recalled taking a proper vacation was in 1980s though he does admit taking a Friday off every now and then to pursue his hobby of sailing.

He has been described as the rock star of stock market by his Irish-born analyst Catherina Columbus who called him Bono though it is undisputed that his stature and worth is far more. However, as a figure of speech it pretty much sums up Heebner’s style.

Heebner admitted in an interview with CNN Money that he is most confident when others around him treat him as nuts. Upon being asked how he evaluates his decision and goes for the kill, he simply replied that it takes him ten minutes to make up his mind. He either knows that he is in for it, or he knows that its failure. He feels that this wisdom is not something that can be taught at a business school. It is the wisdom that took 30 years to be built. It cannot be acquired by an amateur by just studying it. He needs to experience it to come close to the level that Heebner has achieved

Another remarkable feature of Heebner’s investment is that when his investments are profiting, they will profit in huge amounts. However, if they are not profiting, they will certainly be incurring significant amounts of losses. Predictability is a word that Heebner is not well versed with. Investors who are looking for great return at the expense of high risk may very well be suited to Heebner’s investing schemes.

The success and intrigue around this successful spree of Mr. Kenneth Heebner can be gauged by the fact that prior to him Peter Lynch’s 14 year tenure at Fidelity Megellan was considered the gold standard against which investor’s performance was compare. Mr. Lynch was a legend for churning out 36% annual average return. Lynch beat the mark by percentage points during his tenure. The benchmark was 19% of S&P 500. It is an amazing feat and well acknowledged that the only person to have ever beaten that mark is Mr. Kenneth Heebner who beat it by 20 points.
CGM on an average has a 17.2% return rate against the 12.8% of index. It has been recognized that 2001 was one of the best years for the company for all the investments churned out great returns which continued for the next three years. According to Chick Clough of Merril Lynch, “He does the research, and he’s got the courage of his convictions.”

CGM Mutual Fund have been observed to have declined -13.3% during the second quarter of 2010 compared to the Standard and Poor’s 500 Index which lost -11.4% and the Merrill Lynch U.S. Corporate, Government and Mortgage Bond Index which increased 3.5% over the same period. For the first six months of the year, CGM Mutual Fund returned -10.8%, the Standard and Poor’s 500 Index, -6.7%.

28% of CGM funds have been invested in government and corporate bonds by the ends of fourth quarter in 2010. The Fund’s three largest equity holdings were Ford Motor Company, Apple Inc. and Delta Air Lines, Inc. Auto and Related, heavy capital goods and electronic components industries composed the three most invested industries in his portfolio.

As of June 2011, the company’s position holds such that the fund increased its stock of Apple and BHP Billiton whereas it saw a decrease in its stock of Halliburton. During first quarter of 2011, it sold out a lot of stocks of Ford and Sandisk.

CGM’s overall portfolio is highly diversified with the most concentration in the services sector followed by technology, energy and transportation. In the first quarter of 2011, CBS had a return of 32% with a concentration of 3.3% in the total portfolio whereas TATA motors fell by 5%. It represents 4.1% of total portfolio. There were also new additions to the holding with significant allocation to ASML holding and LAM research with 3.3% and 3% of total portfolio respectively.

Overall, CGM may be concluded to be a firm for those investors who understand the market and understand how the dynamics change instantly. Other analysts have often commented that the best time to invest in CGM is not when it is performing well but rather when it is under performing, Heebner is a shrewd investor and knows where his potential holdings lie.

QUOTES

“They told me afterward that I was the only one who showed no evidence that other people’s opinions had any effect whatsoever on what I thought.”

“I’m very happy doing what I’m doing. I’m not retiring”

“I’ve made the most money when my strategy was something few people agreed with. My huge outperformance occurs when I find one of these very contrarian strategies – something supported by a lot of deep analysis – and implement it in a concentrated way in the portfolio.”